Melbourne: Global gold mining takeovers set a record this year with "chest-beating" miners chasing deals as the price of the metal surged, boosting fees at advisory banks BMO Capital Markets, HSBC Bank and Merrill Lynch.
Kinross Gold Corp.'s purchase of Red Back Mining for about $7.1 billion Wednesday took the value of gold deals to $32 billion this year, accounting for 38 per cent of mining acquisitions, according to data compiled by Bloomberg. That's more than twice last year's total for the industry.
"The reason why we may have seen a pickup in activity this year is because gold prices are around $1,200" an ounce, said Greg Fournier, Hong Kong-based head of Asia Pacific region metals and mining investment banking at Merrill Lynch.
"If you have a view that the gold price is strong and is going to go higher then acquiring more reserves or producing properties today makes sense."
Bullion surged to a record $1,266.50 an ounce in June and is set for a 10th straight annual advance, the longest winning streak since at least 1920, attracting investment by fund managers including George Soros and John Paulson.
Further price gains and takeovers may follow, with Newcrest Mining Ltd. and Resolute Mining Ltd. among potential targets, according to Midas Fund, which holds Newmont Mining and Barrick Gold.
Battle of elephants
"There's always a battle of the elephants with gold companies, they like to be the biggest," Grant Craighead, managing director and co-founder of Sydney-based research company Stock Resource, said after Kinross agreed to buy Red Back Monday. "It's a real chest-beating industry."
Bank of Montreal's BMO Capital Markets unit remains the top gold adviser with nine deals worth $20 billion, according to the data. That's followed by HSBC and Bank of America Merrill Lynch unit, which wasn't in the top 20 last year. BMO Capital is also the top mining acquisitions adviser this year.
"There is likely to be more consolidation in the medium-to long-terms as gold producers struggle to grow organically," said Evy Hambro, who oversees about $35 billion in natural resources funds for Black Rock. "This is a global trend," Hambro said, whose responsibilities include Blackrock's Gold and General Fund, which has gained an annualised 24 per cent in past five years.
Gold discoveries have dropped by 4 million ounces a year for the past three decades, Credit Suisse Group AG's Michael Slifirski said in November, citing a presentation from Gold Fields Ltd.
"Gold companies have finite assets," said Richard Phillips, managing director of merger adviser Greenhill Caliburn Pty Ltd. "Producers are under pressure to continue to buy or find gold to replenish the production pipeline and many companies look to do both."
Greenhill, founded by Robert Greenhill, agreed in March to buy Sydney-based Caliburn Partnership Pty for as much as $181 million. The company is advising Lihir Gold, which has agreed to an $8.9 billion takeover from Newcrest, in the second biggest gold acquisition so far this year.
Kazakh Gold Group $11 billion bid to take over its parent Polyus Gold to create the largest producer among the former Soviet Republics is the biggest deal this year.
Getting bigger
"Larger size means greater access to capital markets, geographic and metallurgical diversity, with increased options to redeploy capital," said New York-based Tom Winmill, who helps manage $120 million at the Midas Fund, which had an 83 per cent gain last year, including dividends. There will "definitely" be more consolidation in the gold sector, he said.
Barrick, the world's biggest producer, and Newmont, the largest US gold company, have both signaled in the past two months that they may consider "opportunistic" acquisitions. Producers may generate more than $80 billion in free cash flow through to 2015, according to a Merrill Lynch report on July 27.
To be sure, elevated valuations and restricted access to debt may damp appetite for takeovers. Europe's debt crisis and global market volatility decreased the attractiveness of riskier asset classes in the first half, making it more expensive for companies to finance new deals. "Potential acquirers and operators have been continually disappointed at how debt markets aren't functioning," said Peter Arden, a Melbourne-based senior mining analyst at Ord Minnett, an affiliate of JP Morgan Chase & Co. "It will constrain" takeovers, he said.
Gold will surge to $1,500 an ounce by the end of 2011, Merrill Lynch said, maintaining a forecast made shortly after Lehman Brothers Holdings Inc. collapsed in September 2008.
"The larger companies like Barrick and Newmont and Gold Corp, Kinross in North America in particular, they are all very active consolidators," Merrill Lynch's Fournier.
